ECON203 Chapter 3

As a result of a decrease in the price of online streaming movies, consumers download more movies online and buy fewer DVDs. This is an illustration of

the substitution effect.

Politicians who have to go through elections tend to focus on the short-term net benefits of projects because of

voters' tendency to more easily see short-term benefits rather than long-term ones.

The table below shows the weekly demand for hamburger in a market where there are just three buyers. At a price of $6, the weekly market quantity demanded for hamburger is

17.

In analyzing a market system, economists often assume that firms will choose the production techniques that will give them the maximum revenues.

False

The politicization of monetary and fiscal policies tends to enhance their effectiveness in stabilizing the economy.

False

Toothpaste and toothbrushes are substitute goods.

False

Assume that the graphs show a competitive market for the product stated in the question.

Graph B

Black markets are associated with

ceiling prices and the resulting product shortages.

When congressional representatives vote on an appropriations bill, they must vote yea or nay, taking the bad with the good. This statement best reflects the

concept of limited and bundled choices.

The simple circular flow model shows that

households are on the selling side of the resource market and on the buying side of the product market.

If two variables are inversely related, then as the value of one variable

increases, the value of the other decreases.

Suppose that in the market for computer memory chips, the equilibrium price is $50 per chip. If the current price is $55 per chip, then there will be — of memory chips

a surplus

If the market price is above the equilibrium price,

a surplus will occur and producers will produce less and lower prices.

Critically evaluate: "In comparing the two equilibrium positions in the diagram below, I note that a smaller amount is actually demanded at a lower price. This refutes the law of demand."

a. A decrease in demand from D1 to D2 results in EXCESS SUPPLY Incorrect. b. This causes the price to fall Correct. c. This change in price results in an increase Correctin quantity demanded along the D2 demand curve. d. This change in price results in a DECREASE Correctin quantity supplied .e. The new equilibrium has a lower price and a lower quantity Correctwhen compared to the original equilibrium. f. Does this refute the law of demand: No g. Why: Because there was a change in demand .

Markets, viewed from the perspective of the supply and demand model,

assume many buyers and many sellers of a standardized product.

If products A and B are complements and the price of B decreases, the

demand for A will increase and the quantity of B demanded will increase.

(Consider This) Suppose that coffee growers sell 200 million pounds of coffee beans at $2 per pound in 2015 and 240 million pounds for $3 per pound in 2016. Based on this information, we can conclude that the

demand for coffee beans has increased.

Suppose an excise tax is imposed on product X. We expect this tax to

decrease the demand for complementary good Y and increase the demand for substitute product Z.

Innovation lagged in the centrally planned economies because

enterprises resisted innovation in fear that their production targets would be raised.

The following are explanations of the Law of Demand, except

expectations effect.

An effective antipollution policy from the economic perspective requires that all pollution be eliminated and banned.

False

Asymmetric information always results in adverse selection.

False

Costs can be defined as total payments made to workers, landowners, and capital suppliers less payments to the entrepreneur for organizing and combining the other resources used to produce a good.

False

Demand-side market failures refer to those situations when there is a shortage in the market because buyers want to buy more than what is available in the market.

False

Government's ability to enforce laws and contracts increases private-sector economic risks.

False

Selfishness and self-interest are identical concepts in economics.

False

Society's optimal amount of pollution abatement is where society's marginal benefit of abatement is zero.

False

If there was initially a shortage in the market for a product, then

buyers will drive the price up.

Which of the following is a determinant of supply?

product taxes and subsidies

In this market, economists would call a government-set minimum price of $50 a

price floor.

Refer to the provided table. What is the producer surplus for all producers A, B, C, and D?

$19

Answer the question on the basis of the following table that shows the total costs and total benefits facing a city of five different potential baseball stadiums of increasing size. All figures are in millions of dollars. The marginal cost and marginal benefit of stadium B (relative to A) are

$20 million and $60 million, respectively.

(Advanced analysis) The demand for commodity X is represented by the equation P = 10 - 0.2Q and supply by the equation P = 2 + 0.2Q. If demand changes from P = 10 - .2Q to P = 7 - .3Q, the new equilibrium price is

$4.

Refer to the above diagram of the market for corn. There will be a surplus of 8 thousand bushels at the price of

$4/bushel.

A nation can produce two products: steel and wheat. The table below is the nation's production possibilities schedule. Which of the following output-combinations is unattainable?

4 steel and 55 wheat

Refer to the above graph, which shows the market for bicycles. S1 and D1 are the original supply and demand curves. D2 and D3 and S2 and S3 are possible new demand and supply curves. Starting from the initial equilibrium (point 1), which point on the graph is most likely to be the new equilibrium after the introduction of technological improvements in bicycle production and successful publicity campaigns by the government on the virtues of bicycling to work?

5

The following table illustrates alternative production techniques for producing 18 widgets that can be sold for $1 each, for a total revenue of $18. Based on the data given in the table, the most economically efficient production technique is

A

If the demand curve for product B shifts to the right as the price of product A declines, then

A and B are complementary goods.

Refer to the four graphs above. Select the graph that best shows the changes in demand and supply in the market specified in the following situation: the market for corn, if gasoline producers use more ethanol from corn and good weather during the growing season yields a bumper harvest.

Graph A

In a market system, which of the following is a major benefit of making the firm's owners and investors exclusively shoulder the business risk?

This allows firms to more easily attract labor and other suppliers of inputs.

Which of the following would be considered an example of adverse selection?

Those individuals who most need insurance are the ones most likely to buy it.

An increase in consumer incomes will cause a decrease in the demand for an inferior good.

True

Which of the following statements is correct?

An increase in the price of C will decrease the demand for complementary product D.

The difficulties in managing government in a market economy include the following, except

the close resemblance of government to the "invisible hand."

Opportunity costs exist because

the decision to engage in one activity means forgoing some other activity.

Refer to the figure above, which shows three supply curves for corn. Which of the following would cause the supply of corn to shift from S1 to S2?

the development of a more effective insecticide against corn rootworm

"Price" in the statement of the Law of Supply refers to

the dollar amount necessary to induce a change in the quantity of a good supplied to the market.

If the price of oil increases significantly, buyers and sellers of gasoline will both expect the price of gasoline to also increase. If sellers of gasoline act on their expectations more than the buyers do, then

the equilibrium price of gasoline will increase, while the equilibrium quantity will decrease.

Refer to the provided figure. If box A represents households, B the product market, and C businesses, then flow (2) and flow (4) would represent

the flow of goods and services.

The slope of line (2) on the provided graph is

0.

One implication of the median-voter model, as applied to a vote regarding how much government involvement to have in the economy, is that most voters would find the resulting government involvement either too large or too small.

True

Refer to the diagram for athletic shoes. If the current output of shoes is Q3, then

society would consider additional units of shoes to be less valuable than alternative products.

Refer to the diagrams, in which figures (a) and (b) show demand curves reflecting the prices Alvin and Elmer are willing to pay for a public good, rather than do without it. If the marginal cost of the optimal quantity of this public good is $10, the optimal quantity must be

3 units.

Two major virtues of the market system are that it

allocates resources efficiently and allows economic freedom.

One implication of the median-voter model is that at any point in time, most voters will

find government involvement in the economy to be too much.

If we are considering the relationship between two variables and release one of the other-things-equal assumptions, we would expect

the line representing that relationship on a graph to shift.

A recent study found that an increase in the federal tax on beer (which would increase the price of beer) would reduce the demand for marijuana. Based on this information we can conclude that

beer and marijuana are complementary goods.

A higher price reduces the quantity demanded for a product because

individuals can afford less of the product and will switch to substitutes.

Refer to the diagram. Flow 2 represents

land, labor, capital, and entrepreneurial ability.

One reason that the quantity demanded of a good increases when its price falls is that the

lower price increases the real incomes of buyers, enabling them to buy more.

An "increase in the quantity supplied" suggests a

movement up along the supply curve.

When producers do not have to pay the full cost of producing a product, they tend to

overproduce the product because of a supply-side market failure.

There is a shortage in a market for a product when

quantity demanded is greater than quantity supplied.

If products C and D are close substitutes, an increase in the price of C will

shift the demand curve for D to the right.

If product Y is an inferior good, a decrease in consumer incomes will

shift the demand curve for product Y to the right.

"Unfunded liability" refers to a government commitment to

spend in the future without also committing to collect enough tax money to pay for it.

In 2007, the price of oil increased, which in turn caused the price of natural gas to rise. This can best be explained by saying that oil and natural gas are

substitute goods, and the higher price for oil increased the demand for natural gas.

Answer the question on the basis of the following information for four highway programs of increasing scope. All figures are in millions of dollars.

the marginal cost and marginal benefit of Program A are $2 and $9, respectively.

Allocative efficiency refers to

the production of the product mix most wanted by society.

By an "increase in demand," economists mean that

the quantity demanded at each price in a set of prices is greater.

If a price ceiling is set below the equilibrium price in a market,

the quantity demanded will exceed the quantity supplied.

Suppose that corn prices rise significantly. If farmers expect the price of corn to continue rising relative to other crops, then we would expect

the supply to increase as farmers plant more corn.

When economists speak of "demand" in a particular market, they refer to

the whole demand curve or schedule.

The negative slope of the production possibilities curve is a graphical way of indicating that

to produce more of one product, we must do with less of another.

In a competitive market illustrated by the diagram above, for a price floor to be effective and alter the market situation, it must be set

above $15.

Label each of the following scenarios with the correct combination of price change and quantity change. In some scenarios, it may not be possible from the information given to determine the direction of a particular price change or a particular quantity change. We will symbolize those cases as, respectively, "P?" and "Q?". a. On a hot day, both the demand for lemonade and the supply of lemonade increase.P? CorrectIncrease Correctb. On a cold day, both the demand for ice cream and the supply of ice cream decrease.P? CorrectDecrease Correctc. When Hawaii's Mt. Kilauea erupts violently, the demand on the part of tourists for sightseeing flights increases but the supply of pilots willing to provide these dangerous flights decreases.Increase CorrectQ? Correctd. In a hot area of Arizona where they generate a lot of their electricity with wind turbines, the demand for electricity falls on windy days as people switch off their air conditioners and enjoy the breeze. But at the same time, the amount of electricity supplied increases as the wind turbines spin faster.Decrease

see picture

Which of the diagrams illustrates the effect of a governmental subsidy on the market for AIDS research?

C only

In the foreign exchange market, if Canadian companies import more products from the U.S., then the demand for Canadian dollars will increase.

False

Producing a good in the least costly way is known as allocative efficiency.

False

The licensing and regulation of financial advisers is one way by which the government tries to deal with the problem of inadequate information that financial firms have about their customers.

False

For each of the following situations involving marginal cost (MC) and marginal benefit (MB), indicate whether it would be best to produce more, fewer, or the current number of units. a. 3,000 units at which MC = $10 and MB = $13: More b. 11 units at which MC = $4 and MB = $3: Fewer c. 43,277 units at which MC = $99 and MB = $99: Current number d. 82 units at which MC < MB: More e. 5 units at which MB < MC: Fewer

More Fewer Current number More Fewer

"In the corn market, demand often exceeds supply and supply sometimes exceeds demand." "The price of corn rises and falls in response to changes in supply and demand." In which of these two statements are the terms demand and supply being used correctly?

In the second statement.

Economic growth is shown as an increase in production from inside the production possibilities curve out toward a point on the possibilities curve.

True

In a competitive market, every consumer willing to pay the market price can buy a product and every producer willing to sell the product at that price can sell it.

True

In the foreign exchange market, if Americans significantly increase their investments in securities in British financial markets, one effect is that the dollar will tend to depreciate against the pound.

True

Refer to the diagram. The movement from curve a to curve b could be explained by an increase in the quantity and/or quality of society's productive resources.

True

When the marginal benefits exceed the marginal costs of producing a product, then allocative efficiency is not achieved in the market.

True

A headline reads, "Lumber Prices Up Sharply." In a competitive market, this situation would lead to a(n)

increase in the price of new homes and decrease in quantity.

Refer to the diagram above, which shows three supply curves for corn. Which of the following would cause the supply of corn to shift from S1 to S3?

an increase in the price of soybeans

Monetary policy refers to the government's attempt at smoothing business cycles through the use of changes in

interest rates.

How will each of the following changes in demand and/or supply affect equilibrium price and equilibrium quantity in a competitive market; that is, do price and quantity increase or decrease, or are the answers indeterminate because they depend on the magnitudes of the shifts? a. Supply decreases and demand is constant. b. Demand decreases and supply is constant. c. Supply increases and demand is constant. d. Demand increases and supply increases. e. Demand increases and supply is constant f. Supply increases and demand decreases. g. Demand increases and supply decreases. h. Demand decreases and supply decreases.

a. Supply decreases and demand is constant. Price: Increases Correct Quantity: Decreases Correct b. Demand decreases and supply is constant. Price: Increases Incorrect Quantity: Decreases Correct c. Supply increases and demand is constant. Price: Decreases Correct Quantity: Increases Correct d. Demand increases and supply increases. Price: Indeterminate Correct Quantity: Increases Correct e. Demand increases and supply is constant Price: Increases Correct Quantity: Increases Correct f. Supply increases and demand decreases. Price: Decreases Correct Quantity: Increases Incorrect g. Demand increases and supply decreases. Price: Increases Correct Quantity: Indeterminate Correct h. Demand decreases and supply decreases. Price: Indeterminate Correct Quantity: Decreases

How (if at all) do each of the following events affects the location of a country's production possibilities curve?a. The quality of education increases: Curve shifts outward Correct.b. The number of unemployed workers increases: No change Correct.c. A new technique improves the efficiency of extracting copper from ore: Curve shifts outward Correct.d. A devastating earthquake destroys numerous production facilities: Curve shifts inward Correct. Explanation

a. The quality of education increases: Curve shifts outward Correct. b. The number of unemployed workers increases: No change Correct. c. A new technique improves the efficiency of extracting copper from ore: Curve shifts outward Correct. d. A devastating earthquake destroys numerous production facilities: Curve shifts inward Correct.

In the following question you are asked to determine, other things equal, the effects of a given change in a determinant of demand or supply for product X upon (1) the demand (D) for, or supply (S) of, X; (2) the equilibrium price (P) of X; and (3) the equilibrium quantity (Q) of X. Consumer expectations that the price of X will rise sharply in the future will

increase D, increase P, and increase Q.

With a downsloping demand curve and an upsloping supply curve for a product, an increase in consumer income will

increase equilibrium price and quantity if the product is a normal good.

Janice really likes potatoes. Potatoes cost $1 per pound, and she has $5.00 that she could possibly spend on potatoes or other items. Suppose she feels that the first pound of potatoes is worth $1.50, the second pound is worth $1.14, the third pound is worth $1.05, and all subsequent pounds are worth $0.30. a. How many pounds of potatoes will she purchase? b. What if she only had $2 to spend?

a.3 b.2

Which of the following will cause the demand curve for product A to shift to the left?

an increase in money income if A is an inferior good

The price of pork may increase as a result of

an increase in the cost of producing beef.

Suppose there are three buyers of candy in a market: Tex, Dex, and Rex. The market demand and the individual demands of Tex, Dex, and Rex are shown in the table below. a. Fill in the table (gray-shaded cells) for the missing values. b. Which buyer demands the least at a price of $5? The most at a price of $7? c. Which buyer's quantity demanded increases the most when the price is lowered from $7 to $6? d. Which direction would the market demand curve shift if Tex withdrew from the market? What if Dex doubled his purchases at each possible price? e. Suppose that at a price of $6, the total quantity demanded increases from 20 to 30 . Is this a "change in the quantity demanded" or a "change in demand"?

b. Which buyer demands the least at a price of $5? Dex The most at a price of $7? Rex c. Which buyer's quantity demanded increases the most when the price is lowered from $7 to $6? Rex d. Which direction would the market demand curve shift if Tex withdrew from the market? To the left Correct What if Dex doubled his purchases at each possible price? To the right Correct e. Suppose that at a price of $6, the total quantity demanded increases from 20 to 30 . Is this a "change in the quantity demanded" or a "change in demand"? Change in demand

Refer to the market graph shown above. A black market where the price is $2.00 could result from a price

ceiling set at $1.50.

In the following question you are asked to determine, other things equal, the effects of a given change in a determinant of demand or supply for product X upon (1) the demand (D) for, or supply (S) of, X; (2) the equilibrium price (P) of X; and (3) the equilibrium quantity (Q) of X. An increase in the price of a product that is a complement to X will

decrease D, decrease P, and decrease Q.

Suppose that Steve and Susie each perceive $200 of marginal benefit from a proposed new park, whereas Elizabeth perceives $800. If the proposed tax levied on each for the park would be $300, a majority vote will

defeat this project and resources will be underallocated to it.

Data from the registrar's office at Gigantic State University indicate that over the past 20 years tuition and enrollment have both increased. From this information we can conclude that

factors such as school-age population, incomes, and preferences for education have increased over the 20-year period.

A price floor means that

government is imposing a minimum legal price that is typically above the equilibrium price.

(Consider This) Augi is the hottest new pop singer, but her agent discovers that Internet sales of Augi's music have been poor due to Internet piracy. However, concerts are regularly sold out and merchandise (such as T-shirts) sells well. If Augi wants to enhance profits, economists would most likely recommend that she

keep prices of downloads low and raise prices for concerts and merchandise.

If the supply and demand curves for a product both decrease, then equilibrium

quantity must decline, but equilibrium price may rise, fall, or remain unchanged.

Answer the question on the basis of the given supply and demand data for wheat. If price was initially $4 and free to fluctuate, we would expect the

quantity of wheat supplied to decline as a result of the subsequent price change.

From society's point of view, the economic function of profits and losses is to

reallocate resources from less-desired to more-desired uses.

Attaining "allocative efficiency" means that

resources are being devoted to the production of products most desired by society.

Refer to the diagram, which shows demand and supply conditions in the competitive market for product X. Given D0, if the supply curve moved from S0 to S1, then

supply has decreased and equilibrium quantity has decreased.

In the dollar-yen foreign exchange market, if Japanese companies sharply increase their importation of U.S. products, then the

supply of yen will increase and the yen will depreciate.

Answer the question on the basis of the data given in the following production possibilities table. Refer to the table. As compared to production alternative D, the choice of alternative C would

tend to generate a more rapid growth rate.